On Sept. 27, 2018, the Michigan Department of Treasury released Revenue Administrative Bulletin No. 2018-19 to provide additional guidance regarding the state’s successor liability law.
Under the Michigan successor liability law, a person or entity that purchases a business, whether closed or as a going concern, or some or all of the business’ assets or stock of goods, may be held liable for Michigan taxes owed by the seller, including related interest and penalties. Successor tax liability is a derivative liability that is not subject to challenge, and may arise for both known and unknown unpaid tax liabilities of the purchased business at the time of purchase. Michigan’s successor taxpayer liability law applies to any tax administered by the Michigan Department of Treasury, including, but not limited to, the state’s corporate income tax, sales and use tax, and withholding tax. For the purpose of determining when a transaction falls under the successor liability law, a purchase is defined as the transfer of any consideration, including cancellation of debt, in exchange for a business, some or all of its assets, or some or all of its stock of goods.
Limiting successor liability
The Michigan successor liability law provides that a purchaser can limit its successor liability by creating a formal escrow account sufficient to cover the amount of unpaid taxes, plus accrued interest and penalties, and maintaining the escrow account until the seller provides the purchaser with a valid tax clearance certificate or documentation that the Department did not respond to the seller’s tax clearance certificate request within 60 days. The purchaser is not required to inform the Department of the existence of the escrow account either when it is created or when it is released following the seller’s provision of a valid tax clearance certificate. In the event that the Department discovers an unpaid tax liability of the seller after the release of the escrow account, the purchaser is not subject to successor tax liability if it produces evidence that (1) it created the escrow account, (2) the amount in the account was sufficient to pay the tax and related penalties and interest, and (3) the seller either provided the purchaser with a valid tax clearance certificate or documentation showing that the Department did not respond to the seller’s tax clearance certificate request within 60 days.
Taxpayers purchasing a business, whether closed or as a going concern, or some or all of the business’ assets or stock of goods, should consider conducting an exposure analysis to determine if there is a substantial risk of successor liability. Where such risk is found, the purchaser should consider creating an escrow account sufficient to cover the potential liability, and insist that the seller obtain, and provide to the purchaser, a valid tax clearance certificate issued by the Michigan Department of Treasury.